Last updated in November 2020
How important is property for financial independence? When I tell people that I plan to retire in ten years, one question I always hear is “how many properties do you own?”. And I happily reply “zero”.
For many people, owning property appears to be the only way to become financially free. It is a huge misconception that you need to own property for financial independence. In today’s world, there is more than one path to the goal. However, it may be that buying is cheaper for you than renting.
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Table of Contents
Should you buy property for financial independence?
Property is a lifestyle choice
Whether you want to own or rent a house/flat is predominantly a lifestyle than a financial choice. Lifestyle wise, buying a house to live in or to rent it out is a huge commitment that requires ongoing management.
On the other hand, you can re-decorate or refurbish your house/flat as much as you want. Renting allows for a more carefree lifestyle, you can move easily and have limited responsibility. On the flip side, you have to ask your landlord for permission if you want to redecorate.
Duties when owning property
Buying property solely for financial benefits can potentially make your life miserable if you are not ready to take on this level of commitment. Amongst other tasks, you would have to
- Undergo the buying process (finding a property, negotiating a price, legal commitments)
- Organise a mortgage and potentially refinance later on
- Undertake all maintenance and repairs
If you are thinking of becoming a landlord, you would have to deal with these additional tasks:
- Finding and replacing tenants
- Chasing late rent payments
- Potentially evicting tenants
- Keeping accounts (tax returns etc.)
- Ensure electrical appliances and gas are certified
- Assess whether to keep or sell a rental property
- Dealing with difficult tenants e.g. take legal action
Duties when renting
Compared to owning a property, renting comes with few responsibilities. All you have to do is pay your rent and bills on time and keep your room and furniture in adequate condition.
Do what is right for yourself
Buying property can be a long-winded process and associated with not negligible fees. To not end up with a loss, it is recommended to live in the property for at least five years before selling. Even then, you would need to find a suitable buyer first. Hence, when owning a property, you cannot move easily.
Buying property to let means that not only should you live locally, you also have many additional tasks to take on. Of course, you could use a letting agency to pass on some of your tasks but this would reduce your profit.
Ask yourself what kind of life you want to live. Do you want to stay in the same area for the foreseeable future or do you prefer to move whenever you like? Do you have the time it takes to be a landlord and are you prepared to deal with difficult tenants? These questions should form the basis for the decision on whether you want to buy or rent.
Is it cheaper to buy or to rent?
Looking from it from a purely financial aspect, is it cheaper to buy or to rent? The answer to this question is not easy and changes over time depending on location and house, your mortgage terms and rent price development.
In general, renting is cheaper in the short term, whereas buying property will save you money over the long term. Therefore, the general recommendation is to buy if you can see yourself living in your house/flat for longer than five years.
Average property and rent prices
To get a more exact answer, we can look at average prices. House prices and rents fluctuate widely throughout the country. What may give you a tiny one-bedroom flat in London, may give you a small mansion elsewhere. When renting, the average cost per month is £820 across England but a whopping £1,730 for London.
- House price: £227,000
- Mortgage length: 25 years
- Interest rate: 4.33%
- Total amount repaid: £381,018
- Total paid in interest: £151,018
- Rent: £941
Based on these data, an average person can expect to pay £151,018 in interest for their house or £941 a month for rent. To estimate whether buying would be cheaper, we can divide the total interest paid by the average rent costs. The result shows us that buying would be cheaper after 160 months or 13 years (151,018/941=160).
However, this is a huge simplification as many aspects of buying and owning a property are not taken into account. On one hand, you have cost factors such as stamp duty, house maintenance, but on the other hand, the property is also likely to increase in value (appreciate) over time.
Rent versus Buy calculator
To get an even more exact answer, you can use a Rent versus Buy calculator. For my US readers, Nerdwallet has a super good calculator. Here is a calculator that works for most countries, just ignore the $ symbol and input values in your own currency. Bear in mind that these calculators will only give you an estimate.
Inputting average UK values into the calculator (ignoring the $ symbol) yields the following results:
Based on the calculator, renting should be cheaper after living in the property for 5.3 years. Interestingly, this is in line with the recommendation given in many personal finance communities.
Note that this is a model and your individual results may differ. Additionally, these calculations are based on average value and if you pay less rent, or your property is more expensive, renting forever may very well be cheaper for you.
Should you buy or invest in property in the light of Brexit?
Nobody knows whether Brexit will happen or what housing prices will be like in the next decade. However, just because politicians play games, does not mean all people will suddenly escape from Britain. Where would they all go? Hence, the vast majority of current residents can be expected to remain within Britain. And if they remain, they will need to live somewhere. Therefore, houses will still be relevant.
Housing prices may fall (or not) following Brexit. However, they will probably recover eventually. Even US house prices recovered after the great housing crisis.
How to reach financial independence without property
Ways to invest in property for financial independence and early retirement (FIRE)
As I mentioned earlier, buying property should be a lifestyle choice. So how can you reach financial independence if you plan to move every five years or you want to avoid the responsibilities associated with buying?
When it comes to owning property, most people think in too simplistic ways. You either own a house/flat, or you do not. However, in reality, there are different ways you can use (or not use) property as investment type. You can
- Own the property you live in
- Own the property you live in and rent out rooms
- Own multiple properties with at least one rental
- Not own property and rent
- Not own property and rent but invest in the property market
Not owning property
It is perfectly fine not to own property and remain a renter forever. This lifestyle gives you more freedom and you can still become financially independent. Rather than in property, you can invest in the stock market. This is generally less of a hassle than buying and maintaining a property and also less costly.
With stocks, you do not have the huge upfront costs that come with buying a property, you will not pay any mortgage interest and do not need to worry about leaking roofs and such. Instead, you pay a management fee for your fund or investment and may have transaction costs when buying and selling stocks. Additionally, you have to factor in that you will be paying rent versus a mortgage.
If you invest in a good index tracker, it will grow alongside the market. Over time, you should see an increase in value similar to property appreciation. Property prices may rise and fall more or less frequently than the market, but an investment on this scale (whether in property or in stocks) should always be a long-term plan anyway.
Investing in property
What if you do not want the hassle of owning property but still want a slice of the cake? You can, without directly owning a house/flat, benefit from property appreciation and rent income. In fact, there are multiple ways to do so:
Personally, I am using Brickowner. Brickowner is a peer-to-peer lending organisation that invests in property via crowdfunding. Instead of buying a whole property, you invest in a tiny fraction of it (literally a brick). The good point about Brickowner is that you can start investing with as little as £100. If you feel more confident, you can invest £1,000 to get a £50 bonus when using my link.
Please bear in mind that, as with most forms of investing, you may lose money with peer-to-peer lending. Brickowner recommends to invest into different properties to spread the risks. Some properties may promise huge return, but be aware that this is usually associated with greater risk.
Real Estate Investment Trusts (REITs)
Another way to invest in property are Real Estate Investment Trust (REIT) funds. With REITs, you hand over your money (by buying stocks) to a trust who will lease space and collect rents on the properties. In return for your money, you will obtain dividends. REITs are generally less easily accessible than peer-to-peer lending but still involve less cost and hassle than owning property.
Do you need to own property for financial independence? Summary
Buying and maintaining a property is associated with huge effort and responsibilities. You should not buy a house/flat simply because you see it as a shortcut to financial independence. Consider buying only if you are ready to settle down or you have the time to manage your property as a landlord/landlady.
Buying is likely to be more cost effective if you are planning to own the property for five years or longer. However, you always have to consider your individual circumstances as location and mortgage conditions play a huge role.
Investing in this asset class can seem daunting but there are many detailed guides available helping you to learn more about investing in property. Adopting the habits of self-made millionaires can help you when planning to invest in property.
Should you not wish to buy property, you can still reach financial independence and early retirement (FIRE) as easily as anybody else. Instead of paying a mortgage, you simply continue to pay your rent and invest in an index tracker.
You can also invest in the property market via platforms such as Brickowner or REITs. Always remember, there are many ways to reach the goal of financial independence.
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